OECD: Relax Labor Market Rules

In its latest report on South Korea, issued Tuesday, the Organization for Economic Cooperation and Development makes a number of policy recommendations for one of the big economic issues of the moment: inequality in society.

In line with the political consensus, the OECD says South Korea has plenty of room to boost welfare spending from the current level of 9.6% of gross domestic product – much lower than the OECD average of 22.1% — to reduce income inequality and poverty.

European Pressphoto Agency

South Korean President-elect Park Geun-hye meets Angel Gurria, the secretary-general of the Organization for Economic Cooperation and Development on Feb. 4.

Revenue for such spending could potentially come from a hike in relatively low consumption taxes, the OECD says, but promoting economic growth and improving labor productivity, especially in the under-developed services sector, remains critical, it advises.

Advertisement

The OECD addresses structural issues in the labor market, including the need for greater participation by women in the workforce in order to sustain growth, and the problem of companies forcing out older workers, who are generally more expensive due to South Korea’s age-based salaries.

“Aging is going to be very fast in Korea,” OECD Secretary General Angel Gurria told a news conference in Seoul ahead of the release of the report. “You need all hands on deck.“

While the problem of South Korea’s male-dominated workforce is longstanding, the OECD also weighs in on the more recent phenomenon of the surge in part-time and temporary workers.

One in four workers in South Korea is now on a temporary contract, double the OECD average. Despite South Korea’s low overall unemployment rate, economists and labor groups point out that this masks the fact that many are without secure employment, receive lower pay and don’t get the benefits that full-time positions enjoy.

The issue of labor-market “dualism” should be tackled by loosening labor market rules that provide excessive protections for full-time staff and make it hard for companies to flexibly manage their workforce, the OECD says.

South Korea has some of the strongest protections for regular workers, but the effect of this is to encourage companies to avoid taking on new full-time staff, the OECD notes. The dispute-settlement process over regular workers’ unfair dismissals, for example, often takes too long before a final court ruling, the OECD said, recommending it be simplified and accelerated.

“Relaxing employment protection for regular workers would reduce the incentive for firms to hire non-regular workers as a means to enhance employment flexibility,” said the OECD report.

The OECD also suggests that the retirement allowance, available to all regular workers but not to many non-regular ones, be replaced with corporate pensions to help reduce the labor market dualism.

“Discontinuing tax preferences for retirement allowances would be a step in the right direction,” it said.